Earnings Management? Erroneous Inferences Based on Earnings Frequency Distributions

Journal of Accounting Research, Forthcoming

53 Pages Posted: 7 Jul 2009

See all articles by Cindy Durtschi

Cindy Durtschi

DePaul University - School of Accountancy and MIS

Peter D. Easton

University of Notre Dame - Department of Accountancy

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Date Written: July 7, 2009

Abstract

A vast literature following Hayn [1995] and Burgstahler and Dichev [1997] attributed the so-called 'discontinuities' in earnings distributions around zero to earnings management. Despite recent evidence that these discontinuities are likely caused by other factors, researchers and teachers continue to point to the shapes of these distributions as evidence of earnings management. We provide three sets of further evidence that these discontinuities are likely caused by factors other than earnings management: (1) we provide, as an example, a detailed analysis of the severe effects of sample selection in a recent study; this study erroneously concludes that the shape of an earnings distribution is evidence of earnings management, (2) we provide a simple explanation for the shape of the earnings distribution that is most often cited as evidence of earnings management; the relation between earnings and prices differs with the magnitude and the sign of earnings, and (3) we provide further examples that support the main point of our paper; evidence beyond the mere shape of a distribution must be brought to bear before researchers can draw conclusions regarding the presence/absence of earnings management.

Keywords: earnings management

Suggested Citation

Durtschi, Cindy and Easton, Peter D., Earnings Management? Erroneous Inferences Based on Earnings Frequency Distributions (July 7, 2009). Journal of Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1430925

Cindy Durtschi

DePaul University - School of Accountancy and MIS ( email )

Chicago, IL 60604
United States
312-362-8789 (Phone)

Peter D. Easton (Contact Author)

University of Notre Dame - Department of Accountancy ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-6096 (Phone)
574-631-5127 (Fax)

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